27/01/2012 - Foreign investment in North Africa and the Middle East needs to diversify away from the oil and gas industries and be encouraged to focus on areas which have a greater impact on boosting jobs, according to a new joint study by the OECD and World Economic Forum.

It says despite a decade-long surge in foreign direct investment (FDI) to North Africa and the Middle East (MENA), the region continues to suffer high and persistent unemployment – particularly among the young whose jobless rates exceed 40% in some countries.

The study identifies an underdeveloped private sector and a widespread mismatch between workforce skills and business needs among the causes of the weak impact of FDI on job creation.

Approximately two thirds of FDI into MENA is to the hydrocarbon sector. But the sector is highly capital intensive and generates few jobs in proportion to its levels of investment. The region’s investment promotion agencies should encourage types of FDI which have greater job-creating potential, says the study.

FDI into green field sites creates more employment than mergers and acquisitions of domestic firms by foreign companies. The positive impact is even more marked when directed at labour-intensive sectors such as manufacturing, tourism and renewable energies.

The study argues that FDI can increase employment if targeted policies are put in place to :

Develop skills that match business needs;

Tackle overly rigid labour market regulations;

Integrate more women in the labour force;

Foster business linkages between foreign investors and local suppliers;

Target high value-added sectors;

Tackle corruption and promote responsible business conduct.

The study adds to and updates the OECD/WEF Arab World Competitiveness Report 2011-2012 published in October 2011. The report argues that economic reform must accompany political transition if the root causes of the Arab Spring protests are to be addressed and jobs created for the 2.8 million young people who enter the labour market every year in the MENA region.

The report recommends that government reforms address four priority areas: reducing high levels of unemployment, fostering private sector development, shrinking the proportion of the public sector in the economy, and fighting widespread corruption.